Trust Issues: Pre- and Post-Nuptial Clauses

Tax Returns

Tax returns are a common issue addressed in matrimonial agreements. These provisions should contemplate a range of trust considerations — often more than some practitioners might initially think. For example, a common trust structure is referred to as a “grantor” or “defective” trust in which the settlor creating the trust is taxed on all trust income. Another technique, referred to as a beneficiary defective irrevocable trust or a “BDIT,” is created by a third party, such as a client's mother, but structured so that the beneficiary (e.g., your client) is taxed on trust income even though not the grantor. Some of these trusts (if formed in a jurisdiction that permits this right) may include a tax reimbursement clause that provides an independent trustee the authority, but not the requirement, to reimburse for taxes. This power might also be surrendered (turned off), or triggered (i.e., not effective initially but made effective after the trust was initially formed, and perhaps after the matrimonial agreement was executed). The variability of these provisions can make drafting a matrimonial agreement complex, but administering it even more so. The following is sample language for marital agreements pertaining to how income tax payments and refunds should be allocated by the parties: